Summer breeze or summer squeeze?

New Zealand growth outlook is expected to hold steady

Support stems from RBNZ keeping rates low until second half of 2020

But fuel price pain could mean a Kiwi Christmas with a side of belt tightening

The latest ASB Quarterly Economic Forecast reveals it’s now time to break free from any lingering clouds of gloom and instead focus on the sunny skies ahead, with New Zealand’s economic outlook holding up well despite enduring a winter of discontent.

ASB chief economist Nick Tuffley says it's been a year battered by storms but the signs are there that the economy is slipping into some summertime stability.

"It may seem strange but it’s true, that despite two high-profile uncertainties – stubbornly-weak business confidence and escalating trade tensions between the US and China – we expect that growth in the last part of 2018 and early 2019 will be only a touch softer than what it could have been, slightly below 3% instead of slightly above it.

"That's because while surveying shows us that uncertainty about Government policy is still impacting business confidence and keeping it at low levels, we are encouraged that, to date, there are few tangible signs that the plunge in business confidence has filtered through to economic growth.

"Capital goods imports are holding up, as is credit growth to business. And as the Government firms up key policies, over time the uncertainty business is feeling should reduce,” Tuffley says.

Not chillin' anytime soon are the trade tensions which continue to escalate between the US and China.

"So far New Zealand hasn’t really been impacted but we need to keep wary eyes out for any slowing of Chinese consumer spending growth due to increasing trade restrictions such as tariffs placed on Chinese exports to the US," Tuffley says.

RBNZ now expected to hold OCR until second half of 2020

ASB Economists are now looking further out when it comes to what's on the horizon for interest rates - updating their interest rate forecasts to now remain lower for longer.

"We expect the OCR to remain on hold at its record low of 1.75% until August 2020, which is six months further out than we were anticipating last quarter. This reflects our judgement that the growth and medium-term inflation outlook will not be strong enough to clear the high hurdle necessary to trigger an OCR hike," Tuffley explains.

The team expects a very mild RBNZ tightening cycle peaking at just 2.75% from late 2021. “This is because the RBNZ will be mindful of not getting policy settings too far out of sync with other central banks," Tuffley says.

A Kiwi Christmas with a side of belt tightening

The ASB Quarterly Economic Forecast shows the household sector, which has been relatively well supported by a strong labour market and low borrowing costs, is starting to feel under the pump.

"Rising costs for necessitates (fuel, rent and food) are putting the squeeze on households, particularly those with less disposable income and tighter budgets,"Tuffley says, "Areas of the economy that are exposed to discretionary spending are likely to be vulnerable in the short term."

ASB economists note the key test for the economy over the summer and autumn will be the ability of firms to pass on increased costs onto consumers.

Tuffley suggests, "If firms find demand is not strong enough to absorb higher prices, economic growth and core inflation could slow over the next six months."